Oil Search to lift PNG capacity

Oil Search is pushing for a significant boost to the capacity of its gas export project in Papua New Guinea, vying to add a further two export units as it seeks to boost returns from its assets there.

"A key strategic objective ... is to capitalise on the asset base currently being constructed by the PNG LNG project, by adding a third (and possibly fourth) LNG train," the company's chairman, Richard Lee, told shareholders at Friday's annual meeting. "An expansion of PNG LNG is regarded as the highest value opportunity in our growth portfolio.

"The discovery of a sizeable gas accumulation at P'nyang South in early 2012 has brought us a step closer to underpinning an expansion, with further material gas resource upside in the Highlands being tested over the next 18 months by an extensive seismic and drilling program."

The initial exports from the $US19 billion project begin next year, with the main partners in the project - Oil Search, Exxon Mobil and Santos - raising a further $US1.5 billion of project finance, to fund 70 per cent of the 21 per cent cost increase disclosed late last year. Oil Search's share of the remaining project costs are about $US500 million, it told shareholders.

"We have more than sufficient liquidity to fund these remaining costs, with a cash position at the end of March of $US439 million, an undrawn $US500 million corporate debt facility, as well as strong cash flow generation from our producing assets in PNG," Mr Lee said.

The project has an initial 6.9 million tonne export capacity. As with a number of gas export projects being developed at present, Oil Search is keen to boost exports, at a time when US exporters are also vying to enter the industry.

The emergence of so-called "floating" gas plants and the prospect of cheaper capital costs is likely to be one option on the table for any expansion, as the consortium eyes the best prospective returns given the changing industry dynamics.

Along with the emergence of the US and Canada as prospective exporters of a large volume of gas - although their entry to the market is several years away - a spot market in the international gas trade is emerging in Asia.

Additionally, utilities in north Asia - the main buyers of imported gas - are seeking to force down gas prices, in particular by cutting its link with the oil price. This could help to lift sales of gas, by improving its competitiveness with other fuel sources, but it would also pressure the economics of the large scale export projects being developed at present.

The high cost of gas is, for example, encouraging some large electricity utilities in Japan to develop new coal-fired power stations to head off surging energy prices.

Tokyo Electric is ramping up coal-fired power station plans due to the high cost of gas. It is one of the largest single importers of gas in Asia.